Discussion
of Issues
Issue 1:
Should the application for transfer of Certificate
Nos. 560-W and 488-S in Lake County, from Lake Yale Treatments Associates, Inc.
to Lake Yale Utilities, LLC be approved?
Recommendation:
Yes, the transfer of Certificate Nos. 560-W and
488-S in Lake County is in the public interest and should be approved effective
the date of the Commission’s vote. The resultant order should serve as the
Buyer’s certificates and should be retained by the Buyer. The existing rates
and charges should remain in effect until a change is authorized by the
Commission in a subsequent proceeding. The tariffs reflecting the transfer
should be effective for services rendered or connections made on or after the
stamped approval date on the tariffs pursuant to Rule 25-30.475, Florida
Administrative Code (F.A.C.). The Regulatory Assessment Fees (RAFs) have been
paid through December 31, 2017. The Buyer should be responsible for filing the
2018 Annual Report and all future Annual Reports, and RAFs. (M. Watts,
Salvador, Sibley, Johnson)
Staff Analysis:
On
October 10, 2017, Lake Yale filed an application for the transfer of Certificate
Nos. 560-W and 488-S from LYTA in Lake County. The application is in compliance
with Section 367.071, F.S., and Commission rules concerning applications for
transfer of certificates. The sale occurred on June 30, 2017, contingent upon
Commission approval, pursuant to Section 367.071(1), F.S.
Noticing, Territory, and Land Ownership
The application contains a description
of the water and wastewater service territory, which is appended to this
recommendation as Attachment A. The application also contains a copy of the
assignment and assumption of agreements that was executed on June 28, 2017, as
evidence that the Buyer has access to the land upon which the water treatment
facilities are located pursuant to Rule 25-30.037(1)(s), F.A.C.
On December 11, 2017, staff notified Lake Yale that its application was
not in compliance with the noticing provisions set forth in Section 367.071,
F.S., and Rule 25-30.030, F.A.C. Lake Yale filed a
corrected notice on March 19, 2018. No objections to the transfer were filed,
and the time for doing so has expired.
Purchase Agreement and Financing
Pursuant to Rule 25-30.037(2)(i), and
(j), F.A.C., the application contains a statement regarding financing and a
copy of the Purchase Agreement, which includes the purchase price, terms of
payment, and a list of the assets purchased. Customer advances were credited to
the customers’ accounts. There are no customer deposits, guaranteed revenue
contracts, developer agreements, or debt of Lake Yale that must be disposed of
with regard to the transfer. The Seller and the Buyer entered into an
assignment and assumption of agreements as of June 28, 2017. This document
includes a 99-year lease dated January 1, 1999, for the land associated with
the Utility’s water and wastewater treatment plants, its water transmission and
distribution system, and its wastewater collection system. According to the
Purchase Agreement, the total purchase price for the assets is $136,000.
According to the Buyer, the sale took place on June 30, 2017, subject to
Commission approval, pursuant to Section 367.071(1), F.S.
Facility Description and Compliance
The Lake
Yale water treatment system consists of two water plants with a combined rated
design capacity of 630,000 gallons per day total. The two public water systems,
Lake Yale Estates and Sandpiper Mobile Home Manor, are interconnected and work
with virtual telemetry to control the lead/lag alternating setup. Both water
plants use hypochlorination for disinfection. Lake Yale’s permit, issued by the
SJRWMD, authorizes the use of 0.045 million gallons per day of groundwater for
public supply.
The most
recent Sandpiper Mobile Home Manor Sanitary Survey was performed by the
Department of Environmental Protection (DEP) on August 30, 2018. Based on the
information provided during and following that inspection, the facility was
determined to be in compliance with the DEP rules and regulations.
The DEP
conducted the Lake Yale Estates’ most recent Sanitary Survey on May 3, 2018,
and found the water plant changed the disinfection process from gas chlorine to
hypochlorite without submitting written notification or a permit application to
the DEP, an unpermitted permanent interconnection with Sandpiper Mobile Home
Manor, and the check valve on well #1 was leaking at the time of the
inspection. Per discussion with the DEP and emails received from the Utility, the
valve on well #1 was replaced on October 11, 2018, and Lake Yale is actively
working on obtaining the two outstanding permits.
The
wastewater treatment system has a permitted capacity of 55,000 gallons per day
with an average daily flow of 10,450 gallons per day. The treatment facility consists
of influent screening, extended aeration, secondary clarification, chlorination
with denitrification, and the effluent is disposed of in three percolation
ponds. The collection system consists of four, six, and eight inch polyvinyl chloride
collecting mains and three, four, and six inch force mains with four lift
stations. The last DEP compliance evaluation inspection was conducted on May 3,
2018. A compliance assistance offer letter was issued after the inspection to
help correct the recorded deficiencies. Per discussion with the DEP and emails
received from the Utility, the only outstanding issue is the excessive
vegetation in the rapid infiltration basins. Lake Yale is currently working on
resolving the outstanding violation.
The last
primary and secondary water quality standards tests were performed in November
2015. All the primary water quality standards results were below the DEP-established
maximum contaminant level (MCL). However, the MCL for iron, a secondary water
quality standard, was exceeded. The DEP has not required the Utility to take
action to address Sandpiper Mobile Home Manor’s iron issue. Staff notes that
neither the Utility nor the Commission has received any customer complaints
regarding secondary water quality standards within the last five years. The
next primary and secondary water quality tests should be performed by December
31, 2018.
Technical and Financial Ability
Pursuant to
Rule 25-30.037(2)(l), F.A.C., the application contains statements describing
the technical and financial ability of the Buyer to provide service to the
proposed service area. The Buyer was once appointed to the Citrus County Water
and Wastewater Authority, the local regulatory body for Citrus County, where he
served for seven years. The Buyer also served as the “Class C” representative
for the Legislative Study Committee for Investor-Owned Water and Wastewater
Utility Systems in 2013. He attends yearly training classes through the Florida
Rural Water Association and completed the National Association of Regulatory
Utility Commissioners (NARUC) Rate School in 2001. The Buyer is the owner and
manager of a total of 10 Class C water and wastewater utilities that are
regulated by the Commission.
Staff
reviewed the personal financial statements of the Buyer, as well as the
financial statements of Florida Utility Services 1, LLC.[4]
Based on the above, the Buyer has demonstrated the technical and financial
ability to provide service to the existing service territory.
Rates
and Charges
The Utility’s
rates and charges were last approved when it received water and wastewater
certificates in 1994. The
rates were subsequently amended through six price index and pass through rate adjustments.
The Utility’s existing rates and charges are shown on Schedule No. 3, which is
attached to this recommendation. Rule 25-9.044(1), F.A.C., provides that, in
the case of a change of ownership or control of a utility, the rates,
classifications, and regulations of the former owner must continue unless
authorized to change by this Commission. Therefore, staff recommends that the Utility’s
existing rates and charges remain in effect until a change is authorized by
this Commission in a subsequent proceeding.
Regulatory Assessment Fees and Annual Reports
Staff has verified that the Utility is current with
respect to annual reports and RAFs through December 31, 2017. The Buyer will be
responsible for filing annual reports and paying RAFs for 2018 and all future
years.
Conclusion
Based on the foregoing, staff recommends that the transfer of Certificate Nos. 560-W
and 488-S in Lake County is in the public interest and should be approved
effective the date of the Commission’s vote. The resultant order should serve
as the Buyer’s certificates and should be retained by the Buyer. The existing
rates and charges should remain in effect until a change is authorized by the
Commission in a subsequent proceeding. The tariffs reflecting the transfer
should be effective for services rendered or connections made on or after the
stamped approval date on the tariffs pursuant to Rule 25-30.475, F.A.C. The RAFs
have been paid through December 31, 2017. The Buyer should be responsible for
filing the 2018 Annual Report and all future Annual Reports, and RAFs.
Issue 2: What
is the appropriate net book value for Lake Yale Utilities, LLC’s water and
wastewater system for transfer purposes and should an acquisition adjustment be
approved?
Recommendation:
The net book value of the water and wastewater systems
for transfer purposes are $103,961 and $19,287, respectively, as of June 30,
2017. An acquisition adjustment should not be included in rate base. Within 90
days of the date of the final order, Lake Yale should be required to notify the
Commission in writing that it has adjusted its books in accordance with the
Commission’s decision. The adjustments should be reflected in the 2018 Annual
Report when filed. (Johnson)
Staff Analysis:
Rate
base was last established as of October 31, 1998.[6]
The purpose of establishing net book value for both the water and wastewater
systems is to determine whether an acquisition adjustment should be approved.
The NBV does not include normal ratemaking adjustments for non-used and useful
plant and working capital. The NBV has been updated to reflect balances as of
June 30, 2017. Staff’s recommended NBV, as described below, is shown on
Schedule No. 1.
Utility Plant in Service (UPIS)
The Utility’s
general ledger reflected water and wastewater UPIS balances of $338,248 and
$306,206, respectively, as of June 30, 2017. Staff reviewed UPIS additions
since the last rate case proceeding and as a result, has increased UPIS for
water and wastewater by $48,834 and $132,584, respectively. Therefore, staff
recommends that the Utility’s water and wastewater UPIS balances as of June 30,
2017, should be $387,082 and $438,790, respectively.
Land
Lake Yale
does not own any land. However, the Seller and the Buyer entered into an
assignment and assumption of agreements as of June 28, 2017. This document
includes a 99-year lease dated January 1, 1999, for the land associated with
the Utility’s water and wastewater treatment plants, its water transmission and
distribution system, and its wastewater collection system. Staff recommends a
land balance of $0 as of June 30, 2017.
Accumulated Depreciation
The
Utility’s general ledger reflected water and wastewater accumulated depreciation
balances of $229,371 and $259,726, respectively, as of June 30, 2017. Staff
reviewed UPIS additions since the last rate case proceeding and calculated the
resulting accumulated depreciation balances. As a result, staff has increased the
accumulated depreciation balance for water by $23,043 and increased the balance
for wastewater by $127,383. Therefore, staff recommends that the Utility’s
water and wastewater accumulated depreciation balances as of June 30, 2017,
should be $252,414 and $387,109, respectively.
Contributions-in-Aid-of-Construction (CIAC) and Accumulated
Amortization of CIAC
As of June
30, 2017, the Utility’s general ledger reflected a CIAC balance of $52,004 for water
and $42,434 for wastewater. In response to the audit, Lake Yale requested that
CIAC be imputed based on the total number of customers times the applicable
service availability charges. Staff does not believe recalculating CIAC is
necessary based on the detailed books and records documenting collected CIAC. Staff
reviewed the CIAC balances since the last rate case proceeding and as a result,
has increased CIAC for water and wastewater by $80,603 and $78,691,
respectively.
As of June
30, 2017, the Utility’s general ledger reflected an accumulated amortization of
$32,988 for water and $27,403 for wastewater. In response to the audit, Lake
Yale asserted that two amortization rates should be used to calculate annual water
CIAC amortization, one for plant in service, which excludes general service
plant, and one for meters. The Utility additionally asserted that wastewater
CIAC should be amortized using the composite depreciation rate for plant in
service excluding general service plant as well. This method is consistent with
Rule 25-30.140(9)(A)(B), F.A.C., and therefore, staff believes it is
appropriate. Although staff agrees with Lake Yale’s methodology, staff only
used the specific accounts listed in Rule 25-30.140(1)(N), F.A.C., to calculate
the amortization rates. Staff calculated the accumulated amortization of CIAC
balances since the last rate case proceeding using Lake Yale’s proposed
methodology and as a result, has increased accumulated amortization for water
and wastewater by $68,911 and $61,327, respectively. Therefore, staff recommends
a CIAC balance of $132,607 for water and $121,125 for wastewater. In addition,
staff recommends an accumulated amortization of CIAC balance of $101,899 for
water and $88,730 for wastewater, as of June 30, 2017.
Net Book Value
The Utility’s
general ledger reflected NBV of $89,861 for water and $31,449 for wastewater.
Based on the adjustments described above, staff recommends that the NBV for the
Utility’s water and wastewater systems as of June 30, 2017, are $103,961 and $19,287,
respectively, for a total NBV of $123,247. Staff’s recommended NBV and the
National Association of Regulatory Utility Commissioners, Uniform System of
Accounts (NARUC USOA) balances for UPIS and accumulated depreciation are shown
on Schedule Nos. 1 and 2, as of June 30, 2017.
Acquisition Adjustment
An acquisition
adjustment results when the purchase price differs from the NBV of the assets
at the time of the acquisition. The Utility and its assets were purchased for
$136,000. As stated above, staff has determined the appropriate NBV on a
combined basis is $123,247. Pursuant to Rule 25-30.0371, F.A.C., a positive
acquisition adjustment may be appropriate when the purchase price is greater
than the NBV, and a negative acquisition adjustment may be appropriate when the
purchase price is less than NBV. However, pursuant to Rule 25-30.0371(2),
F.A.C., a positive acquisition adjustment shall not be included in rate base
unless there is proof of extraordinary circumstances. The Buyer did not request
a positive acquisition adjustment. As such, staff recommends that no positive
acquisition adjustment be approved.
Conclusion
Based on the above, staff recommends that the NBV of Lake
Yale’s water and wastewater systems for transfer purposes are $103,961 and $19,287,
respectively, as of June 30, 2017. No acquisition adjustment should be included
in rate base. Within 90 days of the date of the final order, the Buyer should
be required to notify the Commission in writing that it has adjusted its books
in accordance with the Commission’s decision. The adjustments should be
reflected in the Utility’s 2018 Annual Report.
Issue 3:
Should the requested initial customer deposits for
Lake Yale Utilities, LLC be approved?
Recommendation:
Yes. The appropriate initial customer deposits for the residential 5/8 inch x 3/4 inch meter size are $28
for water and $33 for wastewater. The initial customer deposit for all other
residential meter sizes and all general service meter sizes should be two times the
average estimated bill for water and wastewater. The approved initial customer
deposits should be effective for connections made on or after the stamped
approval date on the tariff sheets pursuant to Rule 25-30.475, F.A.C. The Utility
should be required to collect the approved initial customer deposits until
authorized to change them by the Commission in a subsequent proceeding. (Sibley)
Staff Analysis:
Rule 25-30.311, F.A.C.,
contains criteria for collecting, administering, and refunding customer
deposits. Rule 25-30.311(1), F.A.C., requires that each company’s tariff shall
contain its specific criteria for determining the amount of initial deposits. Currently,
Lake Yale is not authorized to collect initial customer deposits. Customer
deposits are designed to minimize the exposure of bad debt expense for the
Utility and, ultimately, the general body of rate payers. In addition,
collection of customer deposits is consistent with one of the fundamental
principles of rate making—ensuring that the cost of providing service is
recovered from the cost causer.
Rule 25-30.311(7), F.A.C., authorizes
utilities to collect new or additional deposits from existing customers not to
exceed an amount equal to the average actual charge for water and/or wastewater
service for two billing periods for the 12-month period immediately prior to
the date of notice. The two billing periods reflect the lag time between the
customer’s usage and the Utility’s collection of the revenues associated with
that usage. Commission practice has been to set initial customer deposits equal
to two months’ bills based on the average consumption for a 12-month period for
each class of customers.[7] The
Utility’s average monthly residential usage is 2,206 gallons per customer.
Therefore, the average residential bill for two billing periods is
approximately $28 for water and $33 for
wastewater.
Based on the above, the appropriate initial customer deposits for the residential 5/8 inch x 3/4 inch meter size meter
size are $28 for water and $33 for wastewater. The initial customer deposit for
all other residential meter sizes and all general service meter sizes should be two
times the average estimated bill for water and wastewater. The approved initial
customer deposits should be effective for connections made on or after the
stamped approval date on the tariff sheets pursuant to Rule 25-30.475, F.A.C.
The Utility should be required to collect the approved initial customer
deposits until authorized to change them by the Commission in a subsequent
proceeding.
Issue 4:
Should this docket be closed?
Recommendation:
If no protest to the proposed agency action is filed
by a substantially affected person within 21 days of the date of the issuance
of the order, a consummating order should be issued and the docket should be
closed administratively upon Commission staff’s verification that the revised
tariff sheets have been filed and the Buyer has notified the Commission in
writing that it has adjusted its books in accordance with the Commission’s
decision. (Brownless)
Staff Analysis:
If no protest to the proposed agency action is filed
by a substantially affected person within 21 days of the date of the issuance
of the order, a consummating order should be issued and the docket should be
closed administratively upon Commission staff’s verification that the revised
tariff sheets have been filed and the Buyer has notified the Commission in
writing that it has adjusted its books in accordance with the Commission’s
decision.
